Does Reducing Unemployment through Government Spending Boost the Economy?
Some experts hold that the key to economic growth is to strengthen the labor market, which is based on the view that because of the reduction in the number of unemployed workers, more individuals can afford to increase spending. As a result, economic growth follows suit.
The Expanding Pool of Savings—Not Declining Unemployment—Is the Key for Economic Growth
However, the key driver of economic growth is an expanding pool of savings, not the state of the labor market. Fixing unemployment without addressing the issue of savings will not increase economic growth.
The pool of savings funds the enhancement and the expansion of the infrastructure. An enhanced and expanded infrastructure permits an increase in the production of the final goods and services required to maintain and promote individuals’ lives and well-being.
If a decline in unemployment were the key driving factor of economic growth, then it would make sense to eliminate unemployment by generating employment programs. For instance, policy makers could follow the advice of John Maynard Keynes and employ individuals in digging ditches, or various other government-sponsored activities, the aim to employ as many people as possible.
Since government does not generate wealth, it would have to divert savings from the wealth generators to various individuals employed in these programs to fund employment programs. This wealth diversion is financed by taxes and levies or by monetary creation.
A policy of wealth diversion depletes the pool of savings. This, in turn, weakens the process of wealth generation and then undermines prospects for real economic growth.
Unhampered Labor Market and Unemployment
Unemployment can be fixed relatively easy if the labor market were free from government tampering. In an unhampered labor market, any individual that wants to work can find a job at a going wage for his skills.
If someone demands a nonmarket related salary and is not prepared to move to other locations, there is no guarantee that he will fi
Article from Mises Wire